© Reuters.  China's regulators ask financial institutions to check local govt debt: sources© Reuters. China’s regulators ask financial institutions to check local govt debt: sources

SHANGHAI (Reuters) – Chinese authorities in the southwestern province of Sichuan have asked financial institutions to conduct self-inspections on their financing of local governments, said two people with direct knowledge of the matter.

The new rules are the latest in a series of tough measures taken by Beijing to rein in local government debt, with policymakers increasingly wary of lurking risks in the world’s second-largest economy.

China’s outstanding local government debt rose 7.5 percent to 16.47 trillion yuan ($2.56 trillion0 at the end of 2017 from the previous year, according to Reuters calculations, but remained within the government’s target.

In a notice dated Jan. 16, the Chengdu city branch of the central bank and the Sichuan branch of the Ministry of Finance (MoF), among others, asked financial institutions to self-inspect their financing of public-private partnership (PPP) projects and local government involvement in funds.

The authorities could not be reached for comment.

The self-inspections also cover guarantees, commitment letters, the use of finance for buying services and loans for land reserves, among other things.

We “need to fully understand the importance of regulating the financing behaviour of local governments, place more importance on guarding against risks,” said the notice.

The self-inspections also include local government financing platforms and the use of public assets as collateral, including land reserves when taking on debt.

The plan echoes a decision by China’s top leadership at its annual economic conference in December, in which policymakers said they would strengthen the regulation of local government debt in 2018 to reduce financial risk.

In January, the China Insurance Regulatory Commission and the MoF said that while the purchase of local government bonds is encouraged, insurers must not provide financing to local governments in ways that violate central government rules.

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